Blockchain: the music industry’s saviour or a false prophet?

At any point in time, there is a latest and greatest new product, technique, form of exercise, diet and so on that will be the answer to all of our problems.

Sometimes that revolutionary thing is not completely understood, but everyone plays along out of fear of appearing to be the idiot in the room. Among today’s hot topics is blockchain, which is hailed as having the capability to put lawyers out of business and revive the music industry.

It is true that blockchain appears to have the potential for very wide application. The Ethereum platform, which permits “smart contracts”, is noteworthy for being flexible and programmable.

However, we are in the very early stages of seeing its potential. Furthermore, the misunderstanding of what it presently does means that an automated transaction is sometimes mislabelled as being blockchain-related.

For that reason, it is worth revisiting what a blockchain actually is. Also known as a distributed ledger or distributed database, a blockchain is a series of hashed together of blocks that record data.

For example, a block could contain a statement about who owns a particular asset. If the ownership changes, that block is not altered. Instead a new block is added to the chain. Any new block needs to be verified before it can be added and the blockchain is decentralised.

Together, this means there is a permanent historical record, which cannot be retrospectively altered, and any changes to it require collusion of all nodes of the network. Finally, blockchain and cryptocurrencies are two different things.

How could this apply to music? At the moment, with acknowledgement that this is still an immature technology, the clear application would be around proof of ownership and payment of fees by streaming services.

The BPI recently reported that in 2016, 30% of overall label revenues were earned via streaming services, rather than physical sales. It is predicted that 2017 could be the year when streaming overtakes physical sales.

Furthermore, the increase in trade income of $44.6m has been attributed to growth in streaming revenues, which has outgrown the decline in physical formats and downloads. Rather than hurting the industry, perhaps streaming is helping it.

Blockchain technology could be utilised to accurately record the owners of content. With that information, streaming services can enter into smart contracts that pay out revenue to the content owners immediately on a track being played.

If the rights owner has an account with the blockchain it could then be paid immediately and automatically. And note that the payment need not be in a wildly fluctuating cryptocurrency, but in hard currency.

The processing of microtransactions already happens in connection with online streaming or purchasing platforms and so receiving and accounting for those payments is not a new issue in need of a solution. It is significant that Spotify recently acquired a blockchain company for that very reason.

New content could be easily added to the blockchain as it is created. A challenge is to move the existing data onto the blockchain. Make no mistake, that is a vast undertaking. However, we are not starting from scratch when it comes to digitising content and the ownership of it.

Furthermore, big data is a massive industry and the potentially huge financial rewards are driving incredible innovation. Appropriate storage and processing power is not going to be the brake on this progress.

Despite the potential benefits, it currently seems exaggerated to say that blockchain technology can revive the music industry on its own.

It cannot be disputed that artists being rewarded, promptly, for their creativity is a positive development. Every artist, whether large or small, wants their money and quickly, and blockchain can help with that. What it cannot solve are the commercial arrangements between labels and artists which govern the apportionment of the new forms of revenue.

Artists remain unhappy with the revenues from their output, but that is not simply down to overall royalty per stream, as their compensation is comprised of several different components.

The music industry faces many challenges and there is no single, magic bullet. Blockchain should not be disregarded on that basis. It could be a very useful tool to help the evolution of the music industry to match changing consumer habits.

Sam Pearse is a Partner in Pillsbury’s corporate corporate and securities practice